Regulation in the energy and commodities markets – What’s next?
A guest blog from Aviv Handler, Managing Director of ETR Advisory
Over recent years the energy and commodities markets have been buffeted by a seemingly endless stream of regulations, which has consumed time and resources. This increasingly regulated environment has arisen as a result of two primary causes:
1. A reaction to the “financial crash” of ten years ago, which led to rules such as EMIR, MiFID II, the Dodd Frank Act and others enforced to reduce systemic risk worldwide.
2. Anti abuse regulations – to prevent incidents such as the “Libor scandal”, resulting in rules such as MAR and REMIT, plus others.
While the stream of rules seems like it’s endless, in fact there are now less new regulations in the pipeline, with the exception of one or two, such as SFTR and the last phases of the MAS reporting rules. So why does it feel like the deluge of regulatory directives is not dissipating? My view is that we have now entered a new phase which sees firms, in hand with the regulators, attempting to “make it work”. Like anything, the real difficulty lies in implementing and executing against a set of rules, adapting the business to work in new ways – and most importantly not being consumed by the cost of change.
To fulfill anti-abuse initiatives there is an increasing number of investigations and sometimes fines. This is an example of rules, that have been in place for some years, being enforced. For example, a few weeks ago, VITOL were fined 5 million Euros by the “CRE”, the French energy regulator, for market manipulation in breach of REMIT. We have also seen many cases in the USA and activity in the Far East, including countless investigations on Chinese commodity exchanges and almost weekly fines in the USA. All of this, combined with the requirement to monitor under some rules, has led to an increased interest not only in the implementation of surveillance systems, but also in a greater focus on the compliance organisation and culture.
In the meantime, many of the rules to combat systemic risk are now “settling in”: In the USA, we are seeing the “Dodd Frank roll back”, which is a reduction in some elements of the rules. In Europe, a large default on the Nordic power market has led to discussions on whether EMIR has been effective. At the same time, the “REFIT” programme, which will likely take effect next year, will reduce the impact of EMIR on some energy and commodities firms. Nevertheless the rules, especially around reporting, are being tweaked continuously, with small changes in EMIR scheduled to take place in the coming weeks, and larger ones being discussed under REMIT.
The financial services industry in particular is seeing an explosion of “Regtech” solutions to help to meet these demanding requirements, with regulators such as the UK’s Financial Conduct Authority recently issuing a “feedback statement” on “digital regulatory reporting”. The start of “Brexit” will also bear a heavy impact for many on how the rules are applied and regulatory status.
The next part of the regulatory journey has begun. From a business perspective, the culture, governance and responsibility for compliance is ever increasing, pushed along in some cases by further regulations, such as the Senior Managers and Certification Regime in the UK. From an IT perspective, innovation and strategic solutions are key. A failure to be on top of the many changes in regulation, whether by rule tuning or legal precedent, will inevitably expose an organisation to the risk of regulatory issues sooner or later.
None of the issues will be solved overnight but it is imperative that firms act now to future proof their businesses in order to be able to adapt quickly to ongoing change.
ETR Advisory is a small consultancy focused on the regulation of the European energy and commodities markets. All views expressed in this post are provided on an independent basis.